Ongoing economic and geopolitical uncertainties will dampen dealmaking and slow down worldwide Initial Public Offerings (IPOs) and mergers and acquisition (M&A) activity in 2020, according to the Global Transactions Forecast 2020 report.
The report published by global law firm Baker McKenzie said that the trend will only pick up in 2021 as the global economy improves, providing more favorable market conditions for M&As and IPOs.
“Beyond 2020, medium-term drivers of transactions are more positive. The economy will be on an upswing and a recovering market will provide opportunities for growth and transactions,” said Ai Ai Wong, chair of Baker McKenzie’s Global Transactional Group.
“In the meantime, regardless of market conditions and across all sectors, companies on the lookout for a technological competitive advantage will seek out acquisitions to enhance their digital capabilities,” she added.
The outlook is similar for the Asia Pacific region, with deal levels likely to fall in 2020 before an upturn in 2021. The downward pressure on transactions in 2019 is partly the result of a reduction in outbound Chinese deals driven by government restrictions placed on outward investment in response to the trade tension with the United States. Another reason for the downward trend is the loss of economic momentum across the region, associated with the global slowdown in demand.
Global M&A volumes to decline
Global M&A volumes are expected to fall to USD 2.1 trillion in 2020, which is USD 700 billion lesser than the estimate for 2019, according to the report.
However, the law firm believes that macro indicators should improve from 2021. This is because the global economy will stabilize, financial market volatility subside and a weakening dollar will improve liquidity.
The firm believes that the appetite for dealmaking will return beginning 2021, laying the foundation for a gradual recovery in M&A volumes. “Acquisitions will remain an important growth strategy for corporations in all major industries, driven in particular by the need to defend against technological disruption,” according to the report.
Baker McKenzie anticipates that M&A activity in the region will decline by 18% to USD 634 billion in 2019. It will decline further to USD 529 billion in 2020 before a modest resurgence resulting from a stabilization of liquidity conditions and improvement in the equity markets in 2021.
“Downward pressure on transactions in 2019 has partly been the result of a reduction in outbound Chinese deals. This pressure was driven by government restrictions placed on outward investment in response to the trade tensions with the US.”
The report highlighted that there have been exceptions, such as healthy M&A activity in Japan and the continued attractiveness of Indonesia, Thailand, and Vietnam to overseas investors.
“Looking ahead, domestic industry consolidation in China and changing consumption and production patterns across the region will be key structural drivers of M&A activity in the years to come,” the report said.
Rebound in IPOs expected in 2021
Global IPO activity slowed down in 2019, which the firm attributed to a deterioration in corporate sentiment due to ongoing economic and geopolitical uncertainties. Therefore, the firm expects the total value of domestic IPOs in 2019 to suffer a 23% decline to USD 116 billion in 2019 and this trend will continue into 2020 amid renewed declines in the global equity markets.
While the firm expects a similar downtrend in IPO proceeds, the potential listing of Saudi Aramco will be a one-off boost to capital raised in 2020, bringing IPO proceeds to USD 215 billion in 2020 from an estimated USD 132 billion this year.
The trend will pick up in 2021 as many of the uncertainties of 2019-2020 such as Brexit, the US presidential elections, and the economic slowdown in the Eurozone would have been resolved by then. The overall improvement in market conditions will lure back potential issuers who have previously held off their listings.
Similarly in the Asia Pacific, the total value of domestic IPOs is also expected to fall by 43% to USD 36 billion in 2019. It will continue to decline further to USD 33 billion in 2020 as corporations are likely to stay similarly cautious. The momentum will only pick up again in 2021-22.
The only exception for 2019 has been Singapore, where listings of four real estate investment trusts helped push total proceeds to an estimated USD 2.4 billion.
Overall, M&A and IPO activity will be disappointing as the global economy takes a downturn due to economic and geopolitical uncertainties. Investors are becoming more cautious, hence selective in deal-makings.
Market conditions aside, McKenzie believes that the prospect for technology deals looks strong. This is because firms across all sectors need to partner with technology players in this disruptive digital age. The firm said in its report that despite the near-term challenges, investors can remain optimistic about the future of the deals landscape.